Kenya’s private sector faces reckoning with waning business conditions

Kenya’s private sector economy suffered a hit to operating conditions in April, as activity and employment declined for the first time in 17 months in the wake of poor weather conditions and intensifying cash flow issues.

The latest report by Stanbic Bank shows that new orders were also broadly unchanged from March after continuous growth since the end of 2017. Firms were thus led to reduce output prices, also for the first time in 17 months.

“Given the delays in the long rains, the planting season for majority of farmers has been negatively impacted. Additionally, the dry spell reduced tea production without resulting in an increase in prices, due to the fact that globally tea supply has substantially increased. Granted, the long rains have started now, however private consumption is always also dragged lower during periods where the weather is poor owing to the high dependence on the agrarian sector.

“Furthermore, various panellists continue to lament a lack of ‘money circulation’ which is creating cash flow issues. Clearly, the government isn’t adequately addressing the arrears issue owed to the private sector,” says Jibran Qureishi, Regional Economist E.A at Stanbic Bank.

Input prices rose at a quicker pace though, as drier than expected weather inflated commodity prices. The headline figure derived from the survey is the Purchasing Managers’ Index™ (PMI™). Readings above 50.0 signal an improvement in business conditions on the previous month, while readings below 50.0 show a deterioration.

From 51.0 in March, the headline PMI slipped below the neutral 50.0 threshold to post 49.3 in April. This marked the first time in nearly one-and-a-half years that the series has fallen into contraction territory, signaling a slight deterioration in business conditions. It was also the fourth successive drop in as many times.

Driving the deterioration at Kenyan businesses was a marginal decline in activity in April. Some companies were affected by dry weather during the normal “long rains” season, leading to a reduction in agricultural output. In addition, many firms cited issues with money circulation in the economy which had a notable impact on activity levels.

Cash flow issues were also noted by many firms reporting falling new orders in April. As such, private sector sales were broadly unchanged from March, ending a 16-month period of growth. New export orders were seemingly unaffected though, with latest data pointing to another sharp rise in sales from abroad.

Weakness around output and new orders led firms to reduce employment slightly in April, the first fall in job numbers since late-2017.

Purchasing activity and stock levels continued to rise, albeit at a weaker pace than in March. Input price inflation in the private sector economy reversed its recent trend, accelerating for the first time in seven months.

This was mostly due to a faster increase in purchasing costs led by higher commodity prices as a result of drier weather conditions.

Firms also noted a rise in fuel prices in the latest survey. At the same time, output charges at Kenyan firms dropped, as firms looked for new customers whilst sales growth slid to a halt.  Nevertheless, business sentiment remained strongly positive in April, dipping only slightly from March’s 54-month high.

Firms related their optimism to plans to improve efficiency and expand into new markets over the coming year.